04/22/09   Comfortably Numb

Editor’s Corner

Comfortably Numb

Ron Rowland

The U.S. stock market is struggling to hold on to gains accrued since early March.  Upward momentum seems to have stalled at resistance around the February highs.  The drop on Monday looked like it might be the beginning of something worse, but there has been no follow-through yet.  The stubborn short-term uptrend is characteristic of bear market rallies which tend to last longer and go farther than anyone expects – which is why such rallies are so dangerous.  Investors are often drawn in just in time for the trend to reverse sharply downward.
Rising volatility is also of concern.  The -4.3% loss in the S&P 500 on Monday was the 11th one-day move of 4% or more so far in 2009, but it had been nearly four weeks since the last such daily move.  The S&P 500 went more than five years (10/15/2002 through 3/18/2008) without any 4% daily swings and only five days that moved more than 3% in either direction.  So far this year, we have had twenty 3% days – an average of more than one per week, causing many investors to become numb to the extreme moves.  The last hour of trading has been particularly treacherous lately.  The high volatility has many causes, but the result is that short-term trading is extremely difficult and risky.  Buy or sell one day early or one day late, and your results can be dramatically different.
The International Monetary Fund, in a report released today, projected that the global economy will shrink by 1.3% in 2009.  Twelve months ago the IMF was expecting 3.8% worldwide growth this year, which calls their forecasting skills into question, but we will not argue with their conclusion.  Not coincidentally, crude oil prices tumbled this week on news of higher inventories and falling demand.  On the other hand, 1Q corporate earnings are coming in far better than expected for many companies.  The key here is “better than expected.”  Business conditions are dreadful, but stocks can still go up when the results are not quite as miserable as the analysts said to expect.
Federal borrowing is surging into unprecedented territory as tax revenues collapse and government spending increases.  A report from UBS says the Treasury will need to sell $2.4 trillion in new Treasury securities in 2009.  Meanwhile the mortgage crisis is now spreading outside the subprime arena.  The number of prime mortgages – borrowers with top credit ratings – that are delinquent by 60 days or more climbed to 743,686 in January, up from 497,131 in December.  The numbers have almost certainly grown much worse since January.  This is one reason the Federal Reserve is probably distressed to see long-term interest rates moving up again.  Today the Ten-Year Treasury yield reached 2.96%, its highest point since just over a month ago when the Fed announced its plan to buy U.S. debt.  We are eager to see what trick Ben Bernanke will pull out of his magic hat this time. 
Consumer Discretionary has moved into the top spot in our sector rankings, led by retailing.  Recent leadership by the retailing sub-sector defies conventional wisdom; we are unaware of any fundamentals that support this kind of relative strength, and the long-term downtrend that began almost two years ago is still far from being broken.  Unless there is some kind of stealth consumer resurgence underway, we can only surmise this to be a technical reaction to the extreme oversold condition that developed last fall.  The financial sector is in third place, but anyone who saw Monday’s -11.2% plunge in the SPDR Financial ETF (XLF) knows this sector is still unbelievably volatile. 
Momentum picked up in the Small Cap and Micro Cap categories while Large Caps lost strength and Mid Caps held steady.  The top three and bottom three categories had minor shifting.  Growth may be losing a little bit of the edge it has recently held over Value, but it is still too early to know for sure.
The frothy Emerging Markets, including Latin America and China, lost strength this past week; the rally in those markets appears to be running out of steam.  Developed markets held mostly steady.  Canada and the EU lost a little of the momentum that had been building.


The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

“We’ve punted into an entirely new calendar.”

CNBC commentator on statement from American Express that they do not see a turn-around until 2010


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